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Bringing Canada into the Twentieth Century

Not too long ago it was reported that the NSLC was taking beer and wine kit sellers to court to stop them from offering in-store vinting and brewing. While the fate of the store owners is unfortunately still up in the air I was glad to see that the media largely dismissed this move as outrageous. The whole story raises the question however, what is the proper role for the state in the sale of alcohol? Now you only have to take a quick look at Ontario’s newspapers from last December to know that this can become a very heated debate very quickly. So instead of beginning this post with a public health, free market, or deficit fighting argument I’d like you to take a look at this list*:

According to the WHO, these are the only nine WHO member states that have full state-run wholesale and retail alcohol monopolies as of 2004. In these countries effectively all beer, wine and spirits are sold through a government agency. I should note that if you’re the type that believes beer under 5% isn’t real beer then you can add Norway and Finland to that list too. Now whatever you think of the merits of state alcohol monopolies you have to admit that this isn’t exactly the world’s most popular policy idea.

There are three arguments that usually get brought out whenever someone has to defend their province’s monopoly: 1. it protects public health 2. It provides the government with valuable revenue and 3. It provides lower prices for consumers.
The first argument is that increased access to alcohol through privatization would have significant public health consequences. Multi-jurisdictional research from Grant Thornton however, suggests that the correlation between government control and the social harms from alcohol is not clear. Instead it appears that there are a variety of factors that influence alcohol-related harms. For example, despite having the lowest number of access points per person in the jurisdictions Grant Thornton studied, Nova Scotia maintained the highest rate of drunk driving. This suggests that if we want to reduce the social costs of alcohol consumption there are other, potentially more effective, approaches we could be taking rather than a restrictive provincial monopoly.

The second argument is that it would be foolish for the government to give up the reliable revenue that an alcohol monopoly provides. In the 2011-2012 fiscal year NSLC generated $221.6 million in profit for the government, which is a lot of money no matter what you think of monopolies. Nevertheless whether a privatization effort is revenue neutral or not largely depends on the details. What taxes will be applied? What mark-up will the government set? Will they auction off licences? etc. The Grant Thornton study concluded that the Ontario government could actually increase revenues if it privatized the LCBO properly. Alberta, which is the most oft-cited privatization example in Canada, saw its revenues from alcohol increase from $598 million in pre-privatization 1993 to $687 million per year in 2012 (2012 dollars).

The third argument has two problems. The first is that using a monopoly to provide lower prices for consumers contradicts the public health mandate of provincial liquor monopolies to restrict access to alcohol. The second is that the idea that a retail monopoly will provide LOWER prices to customers goes against everything we know about monopoly control of a normally competitive marketplace. A 2011 Auditor-General’s report on the LCBO in Ontario determined that the board did not use its large bulk buying power to negotiate lower prices as that would contradict its mandate to promote public health and increase profits for the government. Now the LCBO does provide the third lowest prices on average in Canada, but direct comparisons between provinces are problematic as the largest determinant of the price of alcohol is taxes and mark-ups.

A lot of ink has been spilled on this topic over the years and despite the protestations of columnists most provinces’ liquor monopolies remain firmly in place. So for those that wish to see more competition and choice in their alcohol purchases it may be time to admit that the best prospect for change in this area is through smaller reforms rather than wholesale revolution. If you asked me I’d say allowing beer and wine sales in convenience and grocery stores would be a good place to start.

Eric Blake is a policy analyst at the Atlantic Institute for Market Studies

*A few US states also have similar monopolies, but they are a small minority.